Is the EU ETS dead?

April 20, 2013

I have to admit I was caught off guard by the recent veto of the European Parliament of the proposal of the Commission that would withdraw 900 million allowances from the market and put it back at the end of the current decade. I keep telling my students that European Parliament is the greenest of the European institutions. Did I miss something? Determined to find out I decided to take a look on minutes of the debate preceding the voting in which the proposal of the Commission was rejected 334 to 315 votes.

The most convincing arguments for the proposal came (not surprisingly) from its initiator, Connie Hedegaard. According to her, an effective ETS is simply a practical implementation of the principle that “polluters pays” enshrined in the European Treaty. Although one can disagree with her statements that the economic crisis is the “one overriding reason” for the ineffectiveness of the ETS (one can argue that some member states cheating on their emissions to get free allowances also played an important role in leading to the oversupply), she was right in stating, that many times since the beginning of the economic crisis different governments heavily intervened in the market to spur up the economy. So why shouldn’t the European institutions react to the economic crisis by modifying the ETS? According to her, backloading is simply giving us time to work on a more lasting solution. But overall she stressed, that the alternative to ETS as such is the renationalization of the European energy and climate policy, that especially the Parliament wouldn’t really want.

Many other MEP supporting backloading pointed out, that the proposal of the Commission was way too little to make the system work, but it would give them more time to work on a more comprehensive reform. MEP Chris Davis called it “a sticking plaster” that gives you just enough time to get to the hospital.

But then (as usual) came the Poles….with the usual arguments. “ETS is killing the industry and there is no energy intensive branch in Europe that wouldn’t be opposed to European climate policy” declared MEP Konrad Szymanski. Well… that would indicate, that such companies like Shell, Eon or EnBW have nothing to do with energy. Of course the notion of “deindustrialized Europe” also came up in Mr. Szymanski’s speech. He obviously forgot the almost 1.200.000 jobs created in the area of renewable energy by the end of 2011 (EurObserv’ER 2012, p. 172), the number which would increase much faster with an effective ETS. But Mr. Szymanski’s ignorance can be explained by the fact, that he is a member of the Law and Justice Party (PiS), which mentally, culturally and economically still lives in the 1950s – 1960s and didn’t realize that there are some other sources of energy than coal and nuclear…

Similar ideas were presented by MEP Adam Gierek, for whom backloading would further worsen economic crisis in Europe and increase unemployment. In addition to that it would also increase “energy poverty” among European citizens. The fact that energy companies did already increase electricity prices due to expected much higher price of emission allowances long time ago, which led to windfall profits in many cases, was largely ignored by Mr. Gierek. In another article he stressed that the priority of the Commission should be energy security, not decarbonization. Well, seemingly for Mr. Gierek imported coal is a much better guarantee of energy security and independence than wind turbines or solar panels….

But the most popular arguments against the proposal of the Commission was the alleged threat of unsettling the market. According to MEP Jolanta Emilia Hibner, backloading would make the markets “go crazy”. The ETS functions as it is supposed to: Prices fell due to the economic crisis and will increase when the crisis is over. But is the free market a guarantee of stability? Many MEPs expressed their worry, that supporting Commission’s proposal would mean, that such proposals would come over and over again. But why would interference on the market that would lead to a more stable (though higher) price of the allowances be so bad? Only because it is not set by the “free market”? In few other areas is stability and predictability more important than in the power sector. If an investor doesn’t know whether or not it is worth investing in coal, gas or renewable sources of energy, he will do nothing. Well, this is not the best situation from the point of view of those worrying about energy security. ETS allows limiting emissions where it is the cheapest. But it should allow for the minimum and possibly even maximum price. An example is the model of emissions trading adopted in California, which includes $10 minimum price that shall increase annually by 5% plus the level of inflation. This allows investors in renewable energy to be sure, that they will not have to face an unfair competition from the generators of energy from fossil fuels when due to an economic crisis the price of the allowances falls. How “crazy” the market can be could be seen in the rapid increase of the oil prices in 2008, when it more than doubled within the period of 18 months and then fell by over 70% within the space of weeks: Not a good basis for long-term planning. In the case of oil we couldn’t regulate the supply. In the case of the CO2 allowances we can and should use this possibility to mitigate the threat of the climate change.

Although the reform of the ETS is necessary and long overdue, there is one argument which spoke against the proposal, and ironically it was clearly mentioned by Connie Hedegaard to increase the support for backloading among MEPs: it wouldn’t limit the overall amount of the allowances on the market. It would increase the price of allowances in the short term, but in the long term the price would probably stabilize on a low level. The patient would survive, but it would be rather weak for years to come, which would further postpone urgently necessary investment in our power infrastructure.

Possibly the good side of the Parliament’s rejection is the fact, that the reform of the ETS has become extremely urgent if the EU is to mean anything in the international climate negotiations. Therefore the opposition of the Parliament may force the Council to initiate more radical steps to resuscitate the Emission Trading Scheme and make it more effective in moving European Union towards a low carbon energy sector. But here again any proposal that would even slightly endanger the profits of the large energy companies would be vetoed by Polish government: it did it earlier and will do it again. A way around it could be treating ETS as what it really is: a tool to achieve European environmental goals (Article 191 (1) of the European Treaty). For that it would be possible to use the ordinary legislative procedure, which merely requires the support of the majority of the EU member states. Of course some will argue that the Emission Trading Scheme influences the member states’ choice between different energy sources, which would require unanimous approval of any decision changing it. But such interpretation is far-fetched: member states can develop all sources of energy as long as they take into consideration (read: “pay”) for their external costs. The main task of the ETS is that these costs are included in the generation costs. So far it has failed on this point.

The Parliament’s veto should also be an important factor argument in the only recently initiated discussion over renewable energy and CO2 emissions reduction target for 2030. As pointed out by Ottmar Edenhofer from Potsdam Institute for Research of Climatic Effects, setting an ambitious target for 2030 is of great importance not to discourage investment in technologies that would lead to lower carbon emissions. Whether the 40% emissions reduction target proposed by the Commission in its recently published Green Paper is enough, is rather doubtful.

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Andrzej Ancygier Ph.D, born 1981, specializes in the European energy policy with focus on renewable energy and climate policies. In his PhD dissertation he analyzed the implementation of directives 2001/77/EC and 2009/28/EC in Poland. His research was done mainly when working for the Executive Agency for Competitiveness and Innovation of the European Commission. After returning to Berlin he started teaching a course “European Environmental Policy” at the New York University in Berlin. Currently, as a Research Fellow at the Hertie School of Governance, he analyzes the impact of the German energy transformation on Polish renewable energy and climate policy.